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Never Put a Hunch in Writing

May 14, 2012

I regard myself as something of an expert on the arcane art of economic forecasting and not just because I studied how to build economic models in graduate school.

And it’s not because I spent a few years banging out forecasts at the United Nations and at think tanks. I’m an expert because I have made enough forecasting errors and mistakes to say, without reservation, that the future is unknowable, at least to me. My track record proves that.

I’m not alone.

Just before the 2008 financial crash, Jeremy Siegel, a respected professor of finance at the Wharton School and a prolific pontificator about the markets, wrote in Kiplinger Personal Finance magazine that in 2008 “shares should have a good year, returning 8 percent to 10 percent.” Instead, the market fell by 40 percent. He also forecast that “financial stocks, by far the worst performing in 2007, could well be the best in 2008.” With the demise of Lehman Brothers and the bailouts of so many banks, it’s fair to say he missed that call too. (He also made predictions for the 2008 United States presidential election. Needless to say, he missed the mark.)

I bring this up only because it’s forecasting time again. To the forecasters, the world looks like the aftermath of a barroom brawl in an old John Wayne or Sergio Leone Western. Tables are broken, chairs are everywhere, bottles are smashed, and the cowboys lie scattered.

In other words, things are looking up.

To the forecasters, the world is not yet back to normal, a word no one has been able to define in quite some time. And while it’s not normal, it’s a lot better than it was.

The consensus seems to be that Europe, which is still reeling, could fall onto a knee, but that it’s likely to be only a momentary pause. Asia, aside from Japan, remains beautiful, without any discernable bruises or marks. And yet, some observers think they detect that Asia may have lost a little spring in its step. Most other emerging market countries are expected to continue growing at a relatively brisk pace.

The analysts are also saying the United States is up off the floor, black and blue, a little bit sore, but still big and strong. In fact, the word among economists is that the United States, as in the past, is poised to provide sufficient demand to get the world growing again.

Such a scenario sounds plausible, and there is an additional piece of good news. According to a report from Mc-Kinsey & Company, the middle class in the emerging-market countries has grown very large and very strong. It is now responsible for a good deal of demand. A look at consumption by the middle class in emerging-market countries puts the total at $7 trillion. Depending on how you count it, and, believe me, you can count it lots of different ways, that’s an amount slightly larger than the combined G.D.P.s of Germany, France and Britain. In fact, consumption by this group is one of the reasons that the Purchasing Managers Index, in most of the countries where it is measured, is in positive territory, which indicates growth.

Forecasting is a delicate art and not for the faint of heart. But the consensus is broadly positive for the rest of the year, and only more so going forward.

So, what is my own forecast for the rest of 2012, given my background? As Jeremy Siegel’s example teaches so well, never put your forecast into print. It’s much more difficult to deny it once it’s printed on the page.